In an open economy where government spending was 60 billion

In an open economy where government spending was $60 billion, consumption was $140 billion, taxes were $40 billion, and GDP was $200 billion this year, investment spending was $20 billion. As a result there was: (a) a net capital inflow of $20 billion (b) a net capital outflow of $20 billion (c) a net capital inflow of $40 billion (d) a net capital outflow of $40 billion how to calculate?

Solution

The correct answer is (a) i.e a net capital inflow of $20 billion. The calculation is shown below:

Y = C + I + G = (C-T) + I + G = (140 - 40) + 20 + 60 = $180 billion.

However, the GDP was $200 billion. Since GDP is greater than Y, there must have been a net capital inflow of $20 billion which pulled up the GDP to $200 billion.